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e-FINANCIAL NEWSLETTER
OCTOBER 2010 EDITION

This Issue

 Islamic Banking At A Glance

 IFRS Convergence: A Financial Reform For India
 Ignorance Is Bliss? Not Anymore!
 10 year government bond yield differential of USD/ INR
 Full Capital Account Convertibility- Should India go this Route?
 Sudoku
 Tickle Your Brain!!!
 ABOUT PROMETHEUS……..

‘Prometheus’ is a name synonymous with all of you. Yes, it the one that represents an urge to acquire knowledge
in all of us. But besides that, there is another story that unfolds.

Prometheus was a champion of human-kind known for his intelligence, which stole fire from Zeus and gave it to
the mortals. Zeus, in turn punished him for his crime. They bound him to a rock while a great eagle ate his liver
every day. Thus, Prometheus is ‘blamed’ and ‘credited’ with the creation of Human Beings.

Prometheus belonged to a group of Giants named Titans, who ruled the earth until the Greek God Olympus
overthrew them. When all giants rebelled against the Gods, Prometheus won their favour. The Goddess Athena
admired his actions and in turn taught him astronomy, navigation, mathematics etc., which he spread to others
around him. That is why since that time he became famous as the one disseminating knowledge. Moreover, many
literary works use his name instead of the word ‘Forethought’. Owing to the skills and knowledge he bestowed
over the people, he is widely known in the world.

Another contribution that he made for the welfare of Humankind was that he brought to them Fire, which paved
way for brightness in their lives.

It is with this zeal that all classical works that followed Prometheus conveyed the never depleting thirst to know
more, to explore further and share among all.

We, the Finance Club, with the same thirst present you the October-2010 edition of Prometheus. We hope to
make it a knowledge sharing platform for all of us. Enjoy the brightness and thirst…………..No rules bound, no
boundaries rule!
From The Editor’s Desk…
With great pleasure Prometheus presents you a new edition of e-
newsletter. I also congratulate you for being a part of ALLIANCE University,
the 428th University in the country.

The main motive of the newsletter is to enhance the learning of its readers
and add on to their knowledge. Through this edition of the newsletter,
Prometheus has tried working towards this goal.

I sincerely express my gratitude to Prof. Edwin Castelino, Prof. Mohan

Gopinath, Prof. Mihir Dash and Prof. Anirban Dutta for helping with the
creation of this issue of the newsletter in various capacities. I also thank all
the students who contributed towards the newsletter.

Alliance has a new enthusiastic batch of students and the Finance Club
looks forward to their contributions to the newsletter in the coming
months. Prometheus wishes to make this e- newsletter a platform for all of
you to learn and gain knowledge in the process of moulding yourselves to
be the future successful corporate managers.

I wish you all the very best for your future endeavours.

Sukriti Gupta
 Islamic Banking at a Glance
By: Dnyanesh Palekar

WHAT IS ISLAMIC BANKING?

Islamic Banking is not a new but somewhat an overlooked phenomenon. Its principles have been around since the
early days of Islam. As a genre of financial services, Islamic banking shuns the very idea of interest rates, and rests
on profit-sharing principles. The banking principles are purely based on the Shariah law which upholds the belief
that the wealth is generated through actual trade and investment and one cannot make money out of money.

HOW DO ISLAMIC BANKS OPERATE?

Unlike conventional banking which operates on the principle of interest, an Islamic bank shares the profits with its
client by investing in his venture, while depositors share bank’s profits for investing their money in the bank as
deposit. While giving home finance or consumer loan, what Islamic bank does is it purchases the asset the client
wants to possess and resells it to him or leases it to him on agreed rent till the bank recovers its full investment
with some time value of money. Now it’s again an issue of debate for many Muslim scholars as they consider time
value of money as an indirect form of interest. Also, banks take into consideration the profile of the sector before
investing in any venture. Banks can’t invest in any interest-based ventures or Islamically unethical ventures like
tobacco, alcohol or any other sort of intoxicants, fashion, gambling, vulgar entertainment, etc.

CURRENT REACH OF ISLAMIC BANKING:

Though not as much widely spread as the conventional banks, today the sector is enjoying a boom, due to more
and more people adhering to Islamic values and applying their religion to economics. Islamic finance sector offers
to the retail consumers, to the corporate banking clients and even to the governments a whole choice of
competitive as well as Shariah-compliant products ranging from the equivalent of sovereign bonds (Sukuk),
insurance (Takaful), current accounts, home finance, consumer finance, etc. With market presence in more than
75 countries, this industry deals with the global assets which are about to cross the mark of $1 trillion (nearly 60%
assets coming from the Middle East countries) and is expected to increase at a rate of around 20-25% year on year
and this being the reason why the commercial banking giants like Deutsche Bank, Royal Bank of Scotland, UBS
Bank, ABN Amro Bank, Standard Chartered Bank, HSBC Bank, etc. have also entered into this industry to share the
pie of profits with the pure Islamic banks.
CHALLENGES FOR ISLAMIC BANKING INDUSTRY:

This high pace of growth itself is causing some problems to the industry. Each time a Shariah-compliant financial
product is created, it requires three different types of people to be involved: bankers lawyers and Shariah scholars,
who are very few in the world. Thus, creating Islamic financial products is a complex issue and is itself creating
some challenges for the industry as a whole. Added to this, Islamic financial products based within Islamic financial
framework like an Islamic Window in an International Bank is leading to skepticism from Muslim investors and
challenges to the industry. Also, the capability of offering side of this market is restricted as no international
investment bank has been involved in the market until now. So, the main challenges to the industry are related to
the structuring aspects of the financial products and types of players active in the market. Such challenges have
not stopped international banks from trying to cash in on this growing sector.

ISLAMIC BANKING IN INDIA:

The Islamic finance companies are considered as Non-Banking Financial Companies (NBFCs) in India as the present
Banking Regulation Act doesn’t consider any financial institute as a bank unless it’s based on interest. However,
Islamic Banking in India is possible through a separate legislation, says D. Subbarao, the Governor of Reserve Bank
of India (RBI). Though an RBI study group had earlier rejected the concept of Islamic Banking, it got the backing of
the Raghuram Rajan Committee on Banking Reforms. As a result, the first Islamic bank in the country with active
involvement of the Kerala Government is likely to start operations in Kochi soon. India has vast scope for the
Islamic banking with present sound economic base and many citizens and companies complying with Shariah laws
in business. Also for a section of Indian Muslim community which considers share trading as against the
fundamental of Islam, the formation of an Islamic bank will be relief to them. This industry has a large opportunity
if it gets proper support of the required legislation changes and a positive political will. With its success, it will help
bring a huge untapped money market into action and will also be a healthy contributor to the employment and
economic growth of the country.
 IFRS Convergence: A Financial reform for India
By: Dinesh Chandra Gupta

The development, India has achieved post 1991 economic reform, after which the world started looking it as a
future superpower, needs another round of changes, this time as a financial reform

In Europe the Euro allowed for comparison without currency distortions among the member nations of Euro zone.
Later on they successfully removed the further distortions in the form of accounting standards, with the adoption
of International Financial Reporting Standards (IFRS) across the Europe. After this, rest of the world started
adopting this standard and currently over 100 countries have either converged to IFRS or have declared the date of
adoption.

In line with the global trend, the Institute of Chartered Accountants of India (ICAI) has proposed a roadmap for
convergence with IFRS for certain defined entities (listed entities, banks and insurance entities and certain other
large-sized entities) with effect from accounting periods commencing on or after April 1, 2011. As IFRS impacts
differently on different sectors, India has decided to implement this standard in a phased manner so as not to have
adverse effect.
Adoption of this standard will give Indian companies access to the rest of world like never before and even
potential investors can compare the foreign companies with domestic companies in much easier way as there
would be uniform accounting policies. Some important benefits from the convergence to IFRS can be illustrated as
follows:
IFRS will considerably improve the comparability of entities: IFRS will enhance more comparability among
sectors, countries and companies due to the uniform accounting standard. This can give Indian companies
an advantage to initiate new relationships with investors, customers and suppliers across the globe.
 IFRS will help Indian companies to reduce the cost of capital: Currently if an Indian company wants to raise
capital and list securities in the US capital market or other markets may be required to comply with certain
time taking procedures to meet their regulatory requirements. With convergence to IFRS, these hurdles will
be removed and companies will have better access to global capital markets.
IFRS can also help in increasing global footprints of Indian companies: This new standard will provide the
transparent and comparable financial information and thus will enable the partnership with foreign
entities. This will also reduce post acquisition financial integration costs.
Standalone vs. Consolidated financial statements: Most Indian companies produce their financial
statements in parent/standalone basis which does not give a true picture to investors about the
performance of the company. Though Indian Accounting Standard 21 gives guidelines for the consolidated
financial statements, it does not mandate for the companies to do so. On the other hand, IFRS mandates
companies to produce only consolidated financial statements.
Fair value vs. Historical value: Historical values will be substituted by fair values for several balance sheet
items, through which a company would be able to project its true worth.

While these are the key benefits which can provide Indian corporate a much needed fillip to compete and excel
with their counterparts in the rest of the world, to implement the IFRS will also require proper planning and a
strong determination.

After the reform of 1991, which is popularly known as Liberalization, Privatization and Globalization (LPG), India
has achieved a lot of milestones in these two decades. There is still an urgent need for some policy changes in
financial regulations, to improve coordination among the various regulators. The Government of India has already
proposed several changes such as the Goods & Service Tax (GST) and the Direct Tax Code (DTC), and with these the
convergence to IFRS can initiate a financial reform which can help India in achieving its dream to become a global
superpower.
 Ignorance is Bliss? Not anymore!
By: Anand Kumar Toshniwal

Anand was a happy man after helping his NRI friend John, who wanted money to start a new venture abroad, by
purchasing his ancestral property. Not only did Anand help a friend in need (as the popular saying goes), he also
got a decent property at what he thought was a very good price. However, his happiness was short lived because
what he never realized was that his small ignorance could well turn out to be the biggest mistake of his life.

What was his ignorance? He forgot to withhold tax on the payment he made to John. Now is it such a big mistake?
You’ll see. However let’s start from the start. What actually is the concept of TDS and why TDS?

As the very name suggests, the word "TDS" stands for Tax Deducted at Source. In India, TDS is deducted from
various sources like salaries, interest on securities, etc. The responsibility for deducting tax at source rests with the
person who is making the payment.

Assessees pay tax in the assessment year on income earned in previous year. Due to this rule the tax collection is
delayed till the completion of the previous year. Even sometimes people conceal their income and the tax is not
paid at all. In order to overcome these problems, government started to deduct some amount of tax from the
amount which is receivable by the assessee. The amount of tax so deducted is called as "Tax Deducted at Source"
or TDS in India.

Let us assume that the value of property purchased by Anand was of the amount of ` 1 crore. Thus [assuming John
doesn’t have a PAN card] Anand should have made a deduction of about 20% or the tax rate applicable to John(
whichever is higher1). That would amount to about ` 31 lacs [30% + 3% education cess]. Now the law holds Anand
accountable for making the payment.

So Anand has to make this payment from his own pocket 1. Moreover law also imposes a penalty of 100% of the
amount of tax on Anand in case he doesn’t make payment in time. It doesn’t end there either. The Law also
imposes a simple interest of 1%of the amount of tax for every month or part of it 1 [Within one week from the end
of month in which the payment was made or within two months from the end of month in which credit was
made]. Now let us assume the transaction takes place on 31st of March, 2009. [Thus the period from 1st April, 2009
to 31st march 2010 is 12 months]. So, the interest for the year would be about ` 12 lacs. To summarise, at the end
of the year Anand has a tax liability of ` 74 lacs. [31+31+12]

To worsen the situation, imagine if he doesn’t get to know of the concept of TDS for one more year, then the
liability on the part of Anand at the end of 2 nd year i.e.[31st March,2011] would be `86 lacs. [74+12]

So, for a transaction of amount 1crore Anand would now be paying a tax of ` 86 lacs from his pocket which he
wouldn’t have to pay if he had made the TDS. Oops! This did turn out to be a great folly. The misery doesn’t end
here. He could also be liable for rigorous imprisonment for a term which shall not be less than 3 months, but may
extend up to 7years.

However this story too has a happy ending albeit with a clause. His friend John (Remember him! The NRI who
actually put Anand in this soup) could now become the Hero and save him from the fiasco if he makes the payment
of tax in his tax assessment. In such a situation Anand need not pay any more tax on the transaction.

So what’s the moral of the story?

No, it’s not to deny help to NRI friends but to be careful of the concept of withholding taxes.
 10 year government bond yield differential of USD/ INR

By: Sahil Kapoor

The purpose of this study is to analyze the factors affecting interest rates of central banks. The benchmark interest
rates set by central bank play an important role in moving the prices of currencies in foreign exchange market and
influence the bond prices, which in turn affect the bond yields of government bonds. The benchmark interest rates
directly affect other short term interest rates such as deposits, bank loan, credit card interest rates and adjustable
rate mortgages. Interest rates control the flow of money in the economy. High interest rates curb inflation, but
also slow down the economy. Low interest rates stimulate the economy but also lead to inflation. Interest rates
dictate the flow of investment. Since currencies are the representations of country’s economy, differences in
interest rates affect the relative worth of currencies. Correlations form an integral part of foreign exchange
market. Based on 1 month, 3 month, 6 month and 1 year correlations among different variables, economists and
analyst try to predict future currency trends. In this study, we have established correlations between interest rate
differentials and yield differentials of currency pairs. Theoretically, when interest rates move up, bond yields also
move up, which means that the currency having a higher rate of interest among the two in the currency pair will
be more rewarding as the other rates of interest affected by this single rate also tend to rise, making it a higher
yielding currency. The differential in the interest rates decide, whether the inflows of foreign investment in the
country would rise or fall.

The US economy was in a slow down mode, as the country entered a new decade. The Fed began to ease the
interest rates, a step it took to stem the U.S economy’s slowdown. The year 2001 saw 11 cuts in interest rates,
Hfrom 6.5% in beginning of the year to 1.75% towards the end. The Fed made all possible efforts to induce money
into the economy with lower interest rates, to induce more spending and help in faster revival of the economy.
Since, RBI is dependent on U.S for majority of its exports; RBI too cut its rates. This means that Interest Rate
Differential( IRD) increased though negatively, because magnitudes of cuts in India was less proportionate than in
the U.S. with a decrease in the interest rates, the 10 year bond yields were also affected. Though the yields on 10
year bonds fell in both the countries, the fall was greater for India, because it was considered safe haven for
investment and with increase in demand, prices rose and yields fell more sharply as against in U.S, where the
people were reluctant to invest money because their state of economy was in a critical stage.
For the next three years, the rates fluctuated in U.S around 1-2%. Moreover, deflation posed a bigger threat to
economy, which was trying to get up on its feet again. It was only towards late 2004, that the rates started to pick,
signalling that the U.S economy was on track. This was also the time when yield differential peaked at -.41.

From 2004 onwards, the Fed started increasing the rates, to curb inflationary pressures mounting on the economy.
On account of increased interest rates, the 10 year treasury notes yield increased and the IRD decreased and hence
affected the yield differential even though the Indian bond yields hovered around the same level.

When recession struck the world, the worst impact was on U.S economy. The bond yields were able to maintain
their levels due to stimulus packages by Fed. The impact of US recession was felt in India too though not much
because of the norms in place here pertaining to the inflow coming from foreign countries. The RBI cuts interest
rates to foster the growth in the economy, thereby increasing the yields of the existing bonds in the G-Sec market.
This goes against the rule of decreasing yields with cut in interest rates, due to the effects of many other factors
affecting Indian economy and the G-Sec market.
 Full Capital Account Convertibility- Should India Go This Route?
By: Kunal Bhushan

Today everybody is talking about the issue of FCAC, and people have varied opinion about it. Countries which
cannot fuel their growth on their own due to lack of funds for investments can get funds in this way. Some support
the argument saying this will open whole lot of opportunity for investments; this will remove the bottleneck in the
system. FCAC will allow India to see high level of investments in sectors which have competitive advantage. The
other argument is labor arbitraging which says as the capital and commodities movement is free in the world, the
country can use the immense potential that it has by offering cheap labor.

But the situation on ground is not at all favorable for FCAC. The country has very poor infrastructure and this had
lead to development in patches. There are places which have grown immensely while there are areas which are
extremely backward. The country has almost half of its population managing its livelihood with extreme difficulty.

Presently in our country certain sectors have developed competitive advantage, and the FDI investment is
concentrated in these sectors. If FCAC is allowed, these sectors will see immense investments and will lead to
creation of sector specific jobs. There will be people who will have too many opportunities and there will be those
with absolutely no opportunity. An imbalance may result into social unrest.

The way forward is to invest in infrastructure sector as it is blood vessel for development. The infrastructure sector
includes all form of transport from rail, road, air & sea. Once there is a good infrastructure, it will make way for
overall development.

The government should provide more incentives for investment in infrastructure and other lagging sectors. It
should design policies in order to promote more private- public partnership. The government should come up with
new manufacturing policy as there are sticky issues and the policy doesn’t promote investment. Manufacturing is
one sector where we have all the necessary factors of production present and we can be an alternative to China.
All these are core issues which the government has to see before going ahead and allowing FCAC. As investors
have profit motive but state has to find a balance between growth & social welfare.
 SUDOKU

Each Sudoku has a unique solution that can be reached logically without guessing. Enter digits from 1 to 9 into the
blank spaces. Every row must contain one of each digit. So must every column, as must every 3x3 square.

Try out your skills with numbers!!!!

RULES

• Every row of 9 numbers must include all digits 1 through 9 in any order.
• Every column of 9 numbers must include all digits 1 through 9 in any order.
Every 3 by 3 subsection of the 9 by 9 square must include all digits 1 through 9.
 TICKLE YOUR BRAIN!!!

Please answer the quiz given below and send your answers across to financeclub@alliancelive.com. A
lucky draw will be taken out of the first 25 correct entries and the winner shall be acknowledged.

1. Which of the following statements hold untrue with respect to Reverse Mortgage?

a. Reverse Mortgage is a term used to refer to the borrowing of the loan with house as collateral, but no
interest or principal payment.
b. It is being used by senior citizens to save themselves against hefty loan conditions.
c. No repayment of loans is required until the borrower dies or home is sold.
d. State Bank of India has come up with the first Reverse Mortgage concept for the first time in India.

2. Which is a wrongly matched option?

Panels set up Purpose

a. Kirit Parekh Petroleum Pricing

b. C. Rangarajan Capital Account Convertibility
c. N.C. Saxena Unique Identification Project
d. C. Achuthan SEBI Takeover Code

3. What is being talked about in the following statement?

“A paper attached to a negotiable instrument to enable writing endorsements when the back of the bill is
full.”

a. Allonge
b. Condonation
c. Rider
d. Collegatary
4. Analyse the following statements regarding the launch of Rupee symbol?

I. The symbol has been taken from the devanagari script meaning a coin on gold
II. The 2 parallel lines in the symbol with space in between make an allusion to tricolor

a. I is correct, II is Incorrect
b. I is correct, II is Correct
c. I is Incorrect, II is Correct
d. I is Incorrect, II is Incorrect

5. What is BONDPAR?

a. A system to analyze the performance of Bond Portfolio.

b. A Bond type in Middle East issued at discount and redeemed at par.
c. An acronym for Bond on Notional Delivery Particularly after Retirement.
d. None of the Above.

6. The Book named Alchemy of Finance has been written by the great investor:

a. Benjamin Graham.
b. Warren Buffet.
c. George Soros.
d. David Dodd.
7. Which of the following form a part of set of assumption (s), of IFRS, to be implemented by April, 2011?
I Accrual Basis
II Going Concern
III Stable Measuring Unit

a. I and II.
b. II and III.
c. I and III.
d. All of the above.
8. Which of the following have been the most lucrative merger/ acquisition deal of the decade (2000-2009)?

a. AOL- Time Warner

b. GlaxoWellcome- Smithkline Beecham
c. Royal Dutch- Shell Transport
d. AT&T- Bell South Corp
9. Winner’s Curse in context of Auctions refer to:

a. Seller receiving less than expected

b. Buyer Paying more than expected
c. Seller Receiving fixed and floating income
d. Buyer creating a provision

10. A theory that nominal interest rates in two or more countries should be equal to the required real rate of
return to investors plus compensation for the expected amount of inflation in each country.

a. Newton Effect.
b. Peter Effect.
c. Fisher Effect.
d. Walter Effect.
 CONTRIBUTORS TO THE NEWSLETTER OCTOBER 2010, EDITION

DNYANESH PALEKAR ANAND TOSHNIWAL DINESH CHANDRA GUPTA

KUNAL BHUSHAN SAHIL KAPOOR

 COORDINATORS OF PROMETHEUS 2010

ISH NIROLA ARCHANAA KUMAR KARTHICK.A.S

RISHI PURWAR SUKRITI GUPTA VISHAL AGGARWAL

S. SHAILESH
"Time is the friend of the wonderful company, the enemy of the mediocre."

“time is the friend of the wonderful

company, the enemy of the mediocre.”

- Warren Buffett